The German federal election, which will take place on September 26th, is a once-in-a-lifetime opportunity. Angela Merkel, Europe's pillar of stability, is leaving office, marking the end of an era.
Merkel, Germany's first female chancellor and one of the world's most well-known politicians, guided Europe's largest economy through various crises throughout her 16-year tenure, including the global financial crisis of 2008, the refugee crisis, and the global pandemic.
Germany's future is currently in jeopardy. The election outcome will determine which political parties and ideologies will govern the country in the future. As the new leadership takes over the Bundestag, investors and traders will be looking for signals about the winners and losers in the stock market.
The German federal election of 2021: Everything you need to know
The centre-left Social Democratic Party (SPD) led by Norbert Walter-Borjans and Saskia Esken is set to win the election with 25% of the vote, according to a 20 September survey. Merkel's conservative Christian Democratic Union (CDU), which works along with the Christian Social Union (CSU), is in second place with 22 percent, slightly ahead of the Green Party with 16 percent. With 11 percent, 11 percent, and 6 percent, respectively, the Free Democratic Party (FDP), Alternative for Germany, and The Left are in second place.
Analysts believe that a coalition of two or three parties is the most likely conclusion, given no single party has a big lead. A CDU-led coalition with the Greens and the FDP is predicted, according to UBS' chief investment office, because those parties have more areas of agreement.
“As things stand, this combination would imply that Laschet will be Germany's next chancellor, but this is far from inevitable given the decline in support for his party and his unpopularity among voters,” UBS wrote in a note.
ING also sees a coalition of two or three parties is also possible. “Based on recent events, we've broadened our base case scenario and now see a CDU/Green and a CDU/FDP coalition as the most likely outcomes, or potentially even another attempt to form a three-party coalition, as we did in 2017,” ING wrote in a note.
Latest seat prediction for the German Bundestag by pollster Forsa:
Which combination of parties would hold more than half of the seats in the Bundestag, according to the latest projections?
The influence of the German election on financial markets: DAX
Seasonal data from Seasonax for German markets implies an election pattern. The DAX, a blue-chip index that now includes 40 of Germany's largest firms listed on the Frankfurt Stock Exchange, tends to rally one to two weeks before election day, propelled by expectations for good change. However, the price increase is usually only temporary.
“Prices tend to fall after the election, faster than they have gained ahead of it,” said Dimitri Speck, founder and chief analyst at Seasonax. “The reasons are that the election will not solve existing problems, coalition negotiations will commence, and many investors will be upset with the election outcome,” Speck added in a note.
While seasonal data provides insight into how markets have behaved in the past, it can not predict future performance because various factors are at play. Despite the fact that seasonality implies a pre-election surge for the DAX, the index declined 2.66 percent in the two weeks following the Evergrande crisis, driven by a drop in global markets.
“The German index has been attempting a countertrend move higher after a bad start to the week for the DAX, which recently expanded from the DAX 30 to the DAX 40,” said Victoria Scholar, head of investment at Interactive Investors.
“It has been under pressure since briefly surpassing 16,000 in August, and it now appears that the next support level to test on the downside is at 15,000.” She told capital.com that a breach below this support might lead to additional losses and a test of the May low.
Germany is bracing for a "ongoing era of political uncertainty," with the center-left SPD gaining ground. However, as Anthony Cheung, head of market analysis at Amplify Trading, pointed out, this isn't exactly unexpected, therefore the market impact has been modest according to the polls as of 20 September.
However, in Cheung's opinion, the potential of a coalition administration offers a greater concern because it is generally unwelcomed by the markets. “The concern here is that the government might well find itself in a divided coalition as a result of the split in support across parties, and markets tend to react poorly to any lengthy disruption in political oversight or lack of decisive leadership,” Cheung told capital.com.
Green companies will benefit from any election outcome
Apart from the fact that this election will herald the end of Merkel's reign, there is a broad shift towards environmental measures among all parties. This is unsurprising, given that German people regard climate change to be the most serious issue confronting the country, surpassing COVID-19 in importance.
What is important to German voters?
Climate and environmental challenges surpassed migration as the most urgent issue in mid-2019, according to regular polling on what German people regard as the most pressing issues. The pandemic rose to prominence in March of last year, and it has now surpassed all other concerns.
“One common area of agreement across the major parties' manifestos is the need to address climate change,” according to UBS. “What appears certain is that, regardless of whether coalition wins the election, carbon taxes will rise and green investment will explode in the next parliament.”
The German parliament passed the Climate Protection Act 2021 in June, bringing the new net-zero emissions target from 2050 to 2045, five years earlier. The Greens are shooting for a deadline of 2040.
Despite the common goal of reducing emissions, according to Martin Moyson, chief European economist at German asset management DWS, parties intend to achieve it in various ways. In a letter to clients, Moyson stated, “The CDU/CSU and, above all, the FDP rely more on market-based mechanisms, particularly emissions trading, whilst the Greens, SPD, and Left rely more on taxes and bans.”
The bottom line in the German elections
Because some market volatility is likely in the DAX and there may be a further shift toward green policies, the approaching election may create opportunities for both traders and investors.
Analysts frequently make incorrect predictions, so you should always base your investing or trading decisions on your own research, risk tolerance, and portfolio size. Also, never put money into an investment that you can't afford to lose.
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